Since 2009 we’ve been in an unequivocal bull market. Venture capitalists have raised increasing amounts of money from their investors (LPs) every year. An impressive number of new VCs have been created – most of them with new seed funds. We’ve had an explosion of alternate sources of financing from crowd-sourcing, angels, accelerators, incubators, corporates, corporate incubators. And importantly we’ve had revenue. Consumers buying through smart phones, travelers using the new, shared economy and businesses replacing old software with modern cloud-based solutions.

It has been a good run.

But it won’t last forever. It could last 6 more months or 6 more years for all I know. But the economy grows in cycles and always has: Expansion & contraction. For what ever reason we’re wired to have amnesia during the run up and prescient memories of how we ‘knew it all along’ as soon as the slide begins. I do believe that we are in structural change where technology will increasingly play a bigger role in all facets of life so the long run up for tech is promising through all of these cycles. Once you understand both sides of the cycle you start to recognize signs of behavior during each phase.

I’d like to do a few posts on what life looks like on the way up and perhaps how to keep your head on straight and avoid drinking your own Kool Aid because as I often advise entrepreneurs on irrational exuberance, “In a strong wind even turkeys can fly.” It helps to have seen the way down twice before to know many of the signs. And as I always assert,

“Great companies are built in downturns. It’s where the truly innovative separate themselves from the pack. It’s when the game slows. It’s when the noise stops and you can actually get customer attention, press articles and VC meetings. It’s when you separate the wheat from the chaff. And it’s when mediocre companies get pulverized.”

The Lessons of Shelfware

In the software industry we’ve always had a term that’s a bit of an anachronism called “shelfware.” We used the term to describe software that was purchased with great enthusiasm only to be stored on the shelf and seldom used. Of course back then it literally was sold in a package and stored on a shelf!

You’d imagine that companies selling tons of shelfware would quickly meet their deserved fate in the market, yet the spin around a category of software can fool buyers into thinking they “must have this product to compete.” Case studies get done with ebullient CEO’s espousing the benefits of said software even though their organization was barely using the product. ROI studies were published. People attending marquee conferences with rock bands, prominent speakers, Gartner Group prognosticators and lots of other happy customers. Surely there must be some benefit here??

I remember, for example, when business intelligence swept through companies globally. Every consultant was pitching a process for reinventing your organization through BI. And while it’s true that BI implemented properly can truly give executives insights – in and of itself the software was just software. Poorly implemented this category was the definition of shelfware.

Growth markets have a way of fooling us all. When markets start to turn shelfware companies are the quickest to die. There isn’t anything mission critical to bind the organization to keep using the product, their aren’t strong internal champions and projects quickly get shut down. The problem with shelfware is that if you have great sales people, you have raised tons of VC money from prominent investors, you have some marquee clients and you thus likely have some great press about you it can be hard to tell true success from that which is ephemeral.

One thing I thought was super cheesy about Salesforce.com when I was there was their tagline “Success, Not Software” but on reflection I have to admit that it does have nice way of focusing one on the right priorities

I have had a version of this conversation with nearly every startup with whom I’m involved. When I start to see revenue figures I always want to know the details behind the revenue:

Who championed the project?

For what purpose are they using your software?

Who is the executive sponsor?

Are they integrating it with other solutions?

Have they done a business case on the expected benefits?

Did they do a major training program?

Do we know how many users are logging in? How frequently they’re using the product? What their initial feedback has been?

I’m always paranoid about shelfware. I’m paranoid about the evaporation of revenue. The pattern has appeared many times in my career: PR success, customer pilots, unclear benefits, the selling company scales up sales & market org quickly to meet demand, revenue takes off through brute force and reaches cruising altitude for a couple of years then the market slows, revenue goes into an absolute nosedive and sales & marketing cuts come way too slowly as the organization thinks it can execute its way out of the freefall.

And what’s worse is that when you have shelfware you often gear your organization around selling the same shit at scale and your innovation pipeline slows down leaving you doubly vulnerable.

What to do to Avoid Shelfware?

1. Have an in-house professional services team that implements your software. It will bring down your overall margins but will produce profitable revenue. Most importantly in ensures long-term success. I wrote about The Importance of Professional Services here. I know, I know. Your favorite investor told you this was a bad idea. Trust me – you’ll thank me a few years from now if you control your own destiny and improve quality through services. If your investor worked inside of a SaaS company for years and disagrees with me then listen to them. If they’re a spreadsheet jockey then on this particular issue I promise you they are FOS. Spreadsheet quant does not equal success, properly implemented software does.

2. Work with customers on business cases (for internal use) and ask for case studies (for you to publish in marketing)

3. Create company measures for success that go beyond financial metrics. You manage what you measure so be careful about having too narrowly defined of performance metrics

4. Have sales bonus plans based on more than just sales targets. Perhaps having renewal rates with a good bonus spiff, have a component of MBO tied to usage performance metrics or spiff certain milestones like business plans. These can’t be the main event – sales are sales after all – but can help shape good behavior.

5. Make sure your board challenges you enough about long-term vision & innovation. Not continuing to challenge yourself on product strategy will lead you down long-term ratholes. And I can tell you from 20 years of experience that if your revenue figures are strong very few boards will challenge you beyond your short-term financial successes and 12-month plan. Run board meetings that force strategic discussions rather than cheering sessions focused on financial metrics.

6. Most importantly – YOU need to care. You need to be focused beyond your immediate two quarters. Let’s face it – that trajectory is already set. But no truly great business has ever been built by focusing the overwhelming majority of senior executive time on the hear and now. That’s management by fire. You own making sure your company has good behavior. Your VP sales can’t and won’t save you – s/he’s too busy ringing the cash register. Your board likely won’t unless you have visionaries who are also egg breakers. Marketing won’t likely challenge you enough on this issue as they’re feeding the beast with more pipeline. You need to listen to your product team, watch your competition and work hard on determining whether you’re truly providing value to your customers.

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2x startup Founder & CEO who has gone to the Dark Side of VC. His first company, BuildOnline was sold in 2005, his second, Koral was acquired by Salesforce.com and became known as Salesforce Content, while Mark served as VP Product Management. In 2007 Mark joined GRP Partners in 2007 as a General Partner. He focuses on early-stage technology companies, usually looking at Series A investment, and blogs at the aptly titled Both Sides of the Table.